Semiannual and Quarterly Interest Payments in Bonds

Until now we have been discussing bonds that pay interest once a year, annually. Some bonds pay interest
twice a year (semiannually) or four times a year (quarterly). In these cases, the entries for interest expense and amortization of the discount or premium must be made semiannually or quarterly, respectively.

If a bond pays 16% interest compounded semiannually, instead of paying 16% once a year, it will pay 8% twice a year. Similarly, if the interest is 16% compounded quarterly, it will pay 4% four times a year. The rate is always expressed on an annual basis; the word “compounded” tells you how many times per year it is paid.

If a $100,000, 4-year bond at 12% compounded semiannually is sold on January 1, 19X1 at 95, the entries for the interest and discount amortization will be made on June 30 and December 31, as follows:
 

June 30 Interest Expense 6,000
Cash                                         6,000
 

$100,000 × 12% × 1/2

 

Interest Expense        625
Bond Discount                625

$5,000 discount ÷ 4 × 1/2 .

Dec. 31 Same entries as on June 30.